Nearly 5,600 contracts worth about $65 billion were reviewed and, between Jan. 20 and June 15, 2025, the State Department terminated almost 400 of them — roughly $360 million in contract actions — only to leave behind procedural errors that auditors say may have wasted money and exposed the agency to legal and administrative risk.
Scale and trigger of the review
Within a month of Donald Trump taking office for the second time, the State Department began reviewing contracts for potential termination, focusing in particular on foreign aid and diversity, equity and inclusion initiatives. The effort followed an executive order directing agencies “to review their contracts and grants for cancellation or modification ‘to reduce overall federal spending or reallocate spending to promote efficiency and advance the policies of my administration.’”
The review touched nearly 5,600 contracts with an estimated total value of about $65 billion and produced almost 400 contract terminations between Jan. 20 and June 15, 2025.
Key errors the inspector general documented
The State Department’s inspector general found a string of procedural problems in the termination process. Across a sample of 30 terminated contracts, 25 lacked adequate written termination notices. In 10 cancellation files auditors found two different termination dates listed, which they said “increases the risk of disputed costs, administrative delays or contractor claims.”
Auditors identified at least six terminated contracts where obligated funds were not timely deobligated; as of August 2026, about $8.1 million remained tied up. The IG wrote: “Because [contracting officers] did not take timely action to deobligate excess funds, the department’s ability to redirect those resources to other mission priorities was limited and the risk that the funds would expire before they could be used increased.”
The report also flagged failures to reacquire government property. In four terminated contracts State employees did not ensure contractors returned government‑issued laptops and phones.
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End the scrambleFinancial consequences and recovery steps
The watchdog recommended that officials repurpose the roughly $8.1 million identified as still obligated. The department agreed to follow that recommendation, with one exception: nearly $50,000 that State determined was owed to a contractor as part of a termination settlement.
The IG also recommended specific process improvements. Auditors asked the department to specify steps for returning government‑issued property following a termination, to set procedures for reviewing unused funds from canceled contracts, and to establish a process for tracking deobligation actions. According to the report, officials concurred with all three recommendations.
Related oversight across government
The State IG’s findings came alongside other watchdog reports that show similar frictions when agencies rapidly reduced awards. The Government Accountability Office criticized State for entering inaccurate information into its grant management system after significant cuts to foreign assistance grants, contracts and cooperative agreements — noting, for example, that more than 4,000 awards (out of roughly 10,000) were categorized as both active and terminated.
Other inspectors general reported comparable problems in 2025: the IRS inspector general said the agency could not account for nearly 600 agency electronic devices valued at more than $270,000 from employees who separated in spring 2025, and the Veterans Affairs inspector general found that, while VA employees generally complied with termination requirements, in some cases they had “only a few hours” to complete reviews.
What this means for contracting officers, program managers, and contractors
- Contracting officers: The report highlights the operational consequences when deobligation tracking and termination paperwork are not standardized. Auditors noted some contracting officers had never terminated a contract before, underscoring the need for clearer procedures and training.
- Program managers at State: Funds left obligated limit the department’s ability to reallocate money to mission priorities and increase the risk that funds will expire unused; the IG recommended and the department agreed to steps to identify and repurpose such funds.
- Contractors: Inadequate or inconsistent termination notices and mismatched termination dates create exposure to disputed costs and claims; the IG’s findings point to both administrative delays and potential settlement uncertainty, as shown by the nearly $50,000 retained for a termination settlement.
The inspector general’s report ties administrative detail to tangible costs: missed deobligations, unclear termination records and uncollected government property. State has agreed to the IG’s reforms and to repurpose most of the funds identified, but the record of dual‑coded grants and unreturned devices across agencies suggests the procedural fixes will need careful implementation to prevent a repeat. The IG’s recommendations set a clearer path; the next step is whether standardized procedures, training and tracking systems will close the gaps auditors found.
